When economy is in equilibrium

a. Assume that the economy is in equilibrium at potential GDP and then the
demand for housing sharply declines. What actions could the government take
to move the economy back to potential GDP? Is it possible for the government
to carry out an expansionary fiscal policy if the Reserve Bank of Australia does
not simultaneously increase financial liquidity in the economy? Briefly explain.

  1. Use the following two graphs to answer the following questions. Assume that the
    natural rate of unemployment is 5 per cent and that the inflation rate in the first
    year is 2 per cent.
    a Briefly explain which point on the Phillips curve graph represents the
    same economic situation as point B on the aggregate demand and
    aggregate supply graph.
    b Briefly explain which point on the Phillips curve graph represents the
    same economic situation as point C on the aggregate demand and
    aggregate supply graph.
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    5.
    a. Given that the Phillips curve is derived from the aggregate demand and
    aggregate supply model, why use the Phillips curve analysis? What benefits
    does the Phillips curve analysis offer compared to the AD–AS model?
    b. Briefly explain whether you agree with the following statement: ‘Any economic
    relationship that changes as economic policy changes is not a structural
    relationship.’

Sample Solution

ACED ESSAYS